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Public affairs

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February 9, 2017

Focus on the US

The first few months of the political calendar in the US will be dynamic and marked by significant policy and regulatory developments as the presidency of Donald Trump and new US Congress take shape. The legislative agenda is likely to be loaded with Republican priorities, chief among them revisions to the US tax code, and repeal or significant modification to health care, specifically Obamacare.

Once Obamacare is addressed, the candidates for legislative action are virtually endless, as what for many years was simply the Congressional Republican wish list, is now squarely within the realm of the possible. It involves such issues as undoing much of Dodd-Frank (financial regulation); reversing the Obama Administration’s climate change agenda; making fundamental changes in immigration policy designed to strengthen the border and curb illegal immigration; moving away from global trade deals and toward bilateral agreements; and potentially making profound changes to federal personnel practices to facilitate termination or reassignment of federal workers.

President Trump will continue to roll back specific regulatory initiatives of the Obama Administration, and will continue to identify and select key officials to fill senior roles within the administration. But the likelihood of success for all new initiatives remains subject to the politics of the moment, and will be shaped by the new president's relationship with the Republican-dominated Congress. The coin of the realm in Washington remains floor time in the Senate. When one reviews the President’s agenda, pairs it with the agenda of the House and Senate leaders, and adds into the mix the left-over appropriations work from the 114th Congress that still must be addressed, one quickly realizes that the 115th Congress is gearing up to be one of the busiest in recent memory.

In the midst of Republican control, the Democratic Senate Minority, particularly those Democratic Senators in states that President Trump carried and who are up for re-election in 2018, will have significant sway over how much of this aggressive agenda finds its way to the President’s desk. It is also critical to consider that not all Republicans, and this is especially true in the Senate, are necessarily in favor of the sweeping agenda the President proposes. This potential divergence has already appeared in the emerging debate over the future of Obamacare, as Republican Party members in both chambers begin to question the necessity for immediately repealing with no replacement bill. Should President Trump offer a significant infrastructure proposal along the lines of the approach he discussed during the presidential campaign, it could create an early test of whether the conservative core of the House Republican conference views the Trump spending proposals as a bridge too far.

Focus on Europe

Brexit: What happens now

Six months on from the EU referendum result, the UK Government is no closer to articulating where it wishes to go and how it proposes to get there. The vote is now spoken of in the same breath as the election of Donald Trump and the "No" vote in the Italian constitutional referendum, and is referred to as the beginning of the "populist wave" of "anti-establishment" votes.

The referendum question put to British voters was: "Should the United Kingdom remain a member of the European Union or leave the European Union?" with "Remain a member of the European Union" and "Leave the European Union" as the only options. The referendum was silent on the UK's membership of other international agreements entered into by European countries, which (for the most part) layer themselves around the EU like an onion.

A diagram showing these arrangements is below:

Within the EU, at the core, is the Eurozone and the Schengen Agreement (the latter, confusingly, also contains non-EU members), though the UK has never been a part of either of these. The EU itself sits within the EU Customs Union and the European Economic Area (EEA), the latter of which is also referred to as the Single Market.

The lack of clarity on the UK's future relationship with these other bodies in the original referendum question has caused a logjam in the UK political process, exacerbated in part by the narrowness of the result (52 percent voted to Leave, 48 percent to Remain: there was no "supermajority" threshold). Supporters of what has become known as "hard Brexit" suggest that the Leave vote has also created a mandate for the UK to extricate itself from the entire "onion" and join Kosovo, Kazakhstan and Belarus as the only European countries outside the network of agreements centred on the EU (or alternatively, as some "hard Brexit" advocates suggest, create a series of completely new but as yet undefined bilateral agreements). Supporters of what has become known as "soft Brexit" (who consist primarily of Remain voters) advocate keeping the UK in a similar place to where it is now, but for its EU membership. Under a soft Brexit, the UK would move out a layer and come to rest either alongside Norway (which is in the EEA but not the EU Customs Union) or Turkey (which is in the EU Customs Union but not the EEA). Others still would like a second referendum on whatever arrangement the UK enters into for the most part because they believe that enough Leave voters will have changed their minds to tip the balance in favor of Remain in the event of a rematch.

The questions for the UK include:

Where in the "European onion" it wants to end up; and

Where the UK will be allowed to go by the co-signatories to the agreements that will need to be amended to accommodate a non-EU UK.

The UK may take up a position beside Turkey and remain in the EU Customs Union (a "soft Brexit" position occasionally espoused by the opposition Labour Party) as a permanent or temporary measure post-Brexit.

Turkey has supposedly been moving towards EU membership since 1963, when the Ankara Agreement was signed between Turkey and what was then the European Economic Community. But, in the intervening 53 years, Turkey's progress towards EU membership has stalled. Turkey has managed to enter the EU Customs Union, meaning that it benefits both from free trade with the EU and from its exports to the EU not being held up by customs checks. Turkey does not, however, enjoy the regulatory harmony or free movement of its workers to the EU that comes from Single Market membership. The barriers to Turkey joining the EU, known as "accession", (not least the political barriers) appear intractable.

The UK's current customs infrastructure is designed for an environment where around half the UK's imports do not require customs clearance (coming from elsewhere in the EU Customs Union). Without a dramatic expansion, the UK's customs infrastructure would be overwhelmed by the need for additional checks on goods imported from the EU. Multinational supply chains, which rely on an absence of customs checks between the UK and the other EU Customs Union countries, would also have to make allowances for the additional waiting time for products to clear customs when entering the UK from another EU Customs Union country and vice versa. The UK's supermarkets, which rely on "just in time" deliveries of food (half of which is imported into the UK) would also need to adapt their highly complex supply chains. The UK remaining in the Customs Union (at least on a transitional basis) would be the simplest way of avoiding these issues.

The UK Prime Minister, Theresa May, who was appointed to succeed David Cameron, has made it clear in a speech made on January 17, 2017, that she does not see a future for the UK in the Single Market. Although she has not made it clear, it appears likely that she also wishes to exit the EU Customs Union. However, while on the one hand suggesting a complete extrication from the “onion”, she has also said that she would like this to be accompanied by a comprehensive free trade agreement with the EU. The points made in May's speech were reiterated in a "White Paper" (a UK Government policy document) published on February 2, 2017. Although the White Paper was hailed as a "plan" for Brexit, it contains very little new information on the UK Government's intentions and appears to have been written in a hurry in order to satisfy demands for a White Paper, rather than to address the mechanics of Brexit in any detail. Crucial issues remain unresolved by the White Paper. For example there is, as yet, no detailed UK Government proposal for the management of the border between Northern Ireland and the Republic of Ireland (which is and will remain an EU Member State) upon Brexit. This is a highly contentious issue given the troubled history of Anglo-Irish relations and likely problems a "hard" border will create for the peace process.

May's plans for the UK are no longer necessarily the UK's plans. The UK's Supreme Court ruled on January 24, 2017 in R (on the application of Miller and Dos Santos) v. Secretary of State for Exiting the European Union, holding that the triggering of Article 50 of the Treaty of European Union (TEU) (a recently-inserted exit mechanism in the EU treaties) could not be triggered by the UK government without primary legislation by Parliament authorizing it to do so. The UK Government has responded by publishing a very short Bill which would do just that; however, Members of Parliament are proposing amendments which either try to specify "softer" Brexit terms (e.g. retention of the Single Market) or the ability to approve/reject a deal (with rejection resulting in remaining in the EU).

Adding further uncertainty is the ambiguity on the reversibility of the triggering of Article 50. A key reason the UK Government lost in Miller was because of its concession for the purposes of the case that Article 50 was irreversible. It did so in order to avoid Miller being decided ultimately by the European Court, which has the final say on the interpretation of TEU. An EU court telling the UK how it could leave the EU would have been extremely contentious politically. A case has been launched with the support of "crowdfunding" to bring the question of the reversibility of Article 50 before the European Court via a reference from the Irish courts (the Irish Case).

Yet another ambiguity is whether or not the exit of the UK from the EU also means its exit from the Single Market. As noted above, the Single Market is also known as the EEA, which is held together by the EEA Agreement. This agreement has its own exit clause (Article 127 EEA). It has been suggested that the exit of an EU Member State from the EU would trigger its automatic exit from the EEA; however, a separate mechanism for exit in the EEA Agreement implies otherwise. It is not clear whether Article 127 is intended for use by a former (or soon to be former) EU Member State. In part, this question arises because the EEA Agreement uses the term "Contracting Parties", which is defined inconsistently with respect to the EU and its Member States. Sometimes it means the EU itself, sometimes it means the Member States themselves and sometimes it means both of them. The meaning each time is meant to be "deduced" (to quote Article 2 of the EEA Agreement) from the context in which it is being used and the competencies of the EU and its Member States. The Irish Case is also seeking to resolve the ambiguity around Article 127.

If the UK enters a transitional deal, it is possible, like Turkey's accession process, its exit from the layers of the European “onion” will stall. The UK has an immense bureaucratic task ahead of it in extricating itself from the EU, one which many have suggested it is simply not capable of achieving. The UK's civil service has been shrinking for many years and decades of having the European Commission negotiate international trade agreements on its behalf have left the UK short of the expertise it needs to negotiate its own deals. Additionally, the UK's negotiating partners in the rest of Europe have indicated that they will take a hard line in negotiations. It is therefore unlikely that, this time next year, a clear road map to the UK's final destination will have been made.

Focus on Canada

The election of Donald Trump was, without question, the most important global event to happen in 2016. But Canada’s political, business and public policy leaders must not treat the election as just a uniquely ugly campaign with a surprise outcome that can be looked past. It was a historic event that should shift everyone's thinking about the forces of resentment that resulted in the outcome, and what it means for the years ahead. This isn't the first time a tectonic shift in thinking has been thrust upon us.

On November 27, 2000, Prime Minister Jean Chrétien was elected to his third of three majority governments and his final term as Canada’s Prime Minister. The Official Opposition—Canada’s conservative movement—was directionless and in disarray. In Québec, the separatist parties, the Bloc Québecois and Parti Québecois, lost support for their cause following their defeat in the 1995 Referendum and passage of the federal Clarity Act in 2000. The separatist leader, Lucien Bouchard, resigned as Premier of Québec in 2001. The result was a wide open field for Prime Minister Chrétien to move forward on any domestic or foreign policy agenda he wished to pursue.

Once 9/11 happened, everything changed. Prime Minister Chrétien’s third mandate was set: the Afghanistan mission, establishing the Department of Public Safety, passing anti-terrorism legislation, creating the Canadian Air Transport Security Authority (CATSA), and eventually saying no to the war in Iraq. Mr. Chrétien experienced the Macmillan principle.

British Prime Minister Harold Macmillan was once asked by a young journalist what he feared most in office, and he famously responded, “Events, dear boy, events.” 9/11 was, for Mr. Chrétien, one of those “events”. For Prime Minister Stephen Harper, the global recession of 2008-2009 was his. For Prime Minister Justin Trudeau, the election of Donald Trump is his, and 2017 will be dominated by this event—the biggest event—of 2016.

In 2015, after his cabinet was sworn in, the government made public the mandate letters of Prime Minister Trudeau’s cabinet ministers. Those mandate letters all likely have an addendum now: regardless of portfolio, all ministers must have a comprehensive engagement plan with the United States for the life of this mandate.

The range of policy anxieties that are now clear and present to Prime Minister Trudeau’s government are broad. A few examples:

Auto sector: Canada’s auto sector is the eight largest in the world, integrated through North America, globally competitive and employs more than half a million Canadians. The Canadian auto industry depends heavily on access to the American market, with $135 billion in two-way trade, with America absorbing roughly two-thirds of Canada’s parts production and 85 percent of Canada’s vehicle output. With President Trump directly criticizing business decisions by auto firms to invest in Mexico, the Canadian sector is rightfully concerned.

Regulatory cooperation: In 2011, the Canada-US Regulatory Cooperation Council and the Beyond the Border Initiative were put in place to spur greater economic integration. With the North American Free Trade Agreement (NAFTA) having been the subject of a withering attack by President Trump, Senator Bernie Sanders, and emboldened players in both the Republican and Democratic Parties, it is unclear where this integration initiative will now end up.

Border management: While President Trump’s commitment to “build a wall” along America’s southern border is well known, what is less well known are his thoughts on the northern border. More than 400,000 people cross the Canada-US border each day, as does an average of US$1.7 billion in commercial activity. Efficiency of infrastructure, data sharing, supply chain realities are all dependent on a cooperative and collaborative policy approach.

Mutual defense: Canada and the United States have shared interests in the defense and security of the North American continent. From policing the Canada-US shared border to participation in joint operations through NORAD and NATO, Canada and the US share a deep commitment to mutual defense. Initiatives like the Shiprider program that allows Canadian and American enforcement officials to move in tandem to protect the waterways along the border demonstrate the interconnectedness of their security interests. The Permanent Joint Board on Defense also remains an important tool for the Canadian and American militaries to have frank discussions, and exchange views and information regarding joint security.

With one in five Canadian jobs dependent on trade with the United States, and those jobs at risk in export dependent industries from the auto sector to agriculture to forestry and more, Donald Trump’s Presidency must now be at the center of Canada’s policy planning. In every region, in every aspect of the Canadian economy, it is all at stake, and Canada will need to engage with America anew. While the Canada-US relationship has been a most prosperous two-way economic relationship, the election of President Trump presents a challenge to Canada and Canada needs to be ready, engaged and persistent in protecting our interests. This responsibility lies not only with Ottawa, but also with the provincial governments, big city mayors, business leaders, and others who must shoulder responsibility for engagement with a more distrusting and cynical leadership in the US.

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